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Not Feeling Quite Cosi

Not all is bleak for the downbeat cafe company, though management's job is considerable.

What a year (and change) it's been for trendy café operator Cosi(NASDAQ:COSI). Last November, around the time of its IPO, Matt Richey was cautiously comparing it to Panera Bread(NASDAQ:PNRA) based on its charming restaurants and distinctive, tasty edibles.

Now, you'd be hard-pressed to find a commentator with much good to say about it: While its shares are up today on news that it raised some cash, they've mostly fallen (and trailed the S&P 500 badly) since going public. But has investor sentiment turned too sour?

"There are essentially two ways to make a mint in restaurant stocks," wrote Rick Aristotle Munarriz in a column earlier this month. "Either you find a savvy company at a reasonable price that seems to produce a steady flow of earnings in good and bad times, or you find a company that is raw on the operations side but flourishing in popularity."

Cosi certainly doesn't fit the first description. It has yet to turn a net profit, in large part because of increasing restaurant operating expenses: Cost of sales, which includes that aforementioned figure, increased on a compounded basis as quickly as has sales between the years ended 2002 and 1998, respectively. (Cosi has had better luck creating operating leverage.)

It might someday come to fit the second -- same-store sales growth has been one of the company's bright spots in recent periods. One hopes some of that can be attributed to the widespread changes made to Cosi management in the latter half of 2003 that started with a new CEO and continued on down. The menu has also changed with the company.

The picture is hardly clear at Cosi, where the balance sheet -- while improved thanks to the aforementioned cash influx -- still carries considerable debt. Operating cash flow is but a dream at this point. Management has plenty to do before this company can justify itself as a worthy restaurant investment. Not all, however, is bleak.